Abstract

The environment, which shapes investment agreements in the developing world, is undergoing noteworthy changes. This paper seeks to highlight and explain these changes through a law-and-economics lens and a focus on Latin America. Our analysis is divided into two main sections. The first section examines the global proliferation of South-South investment flows globally and within the Latin American context in particular. Several studies by UNCTAD have shown that foreign direct investment flows originating from, and going to, developing countries appear to be growing faster than those from developed to developing countries since the late 1990's. We look at a wide range of different South-South investment agreements, including Free Trade Agreements with investment components and Bilateral Investment Treaties. Our central question is to answer whether the same incentives that underlie North-South investment relationships pertain to purely South-South ones. We find that the mainstream rationales that explain North-South investment, such as "rationale choice theory" and "competing for capital" are also able to explain a significant portion of South-South investment. This is due to the fact that many developing countries are acquiring the same characteristics as their developed counterparts, such as becoming outward investors. Other South-South investment agreements differentiate themselves from North-South ones in the sense that they incorporate development issues as well as attempt to exploit the regions where they might have comparative advantage over Northern investors. The second section of the paper focuses on the different types of investment agreements, which Latin American countries have at their disposal today. We attempt to highlight the differences between the investment options and answer what factors guide the choice for Latin American countries between them. Transaction costs minimization, trade linkage and economies of scale and scope are some of the factors considered to play a role in such decisions. In the face of an increasingly complex and multifaceted investment environment, developing countries need to improve their ability to assess the economic and social implications of choosing one type of investment agreement over another.